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Safe driving plans: real deal or crash and burn?

DENTON (UNT), Texas — You’ve likely heard of “safe driving plans” like Progressive’s “Snapshot” and State Farm’s “Drive Safe and Save,” but do they actually save drivers – or even the companies that offer them – money?

The answer, is yes, according to a University of North Texas researcher. However, there’s something that could save individuals even more.

The key? It’s you, the driver, or more specifically, your data, says Yu-Luen Ma, professor of insurance and risk management in the G. Brint Ryan College of Business.

In her latest study, completed with engineering, statistics and transportation experts thanks to a $300,000 grant from the U.S. Federal Highway Administration, Ma, a co-principal researcher, and her team studied Usage-Based Insurance or Pay-As-You-Drive-And-You-Save. Coupled with GPS devices, smartphones, data analytics and other telematics technology, these plans allow insurers to monitor driving behavior in real time and reward individuals for driving safely. Among the findings:

More is better. The more telematics data insurers have about how far individuals drive, how they behave behind the wheel and when they travel, the more effective insurers are at calculating the policyholder’s crash risk and insurance rates.

Low-risk drivers would save from such UBI or PAYDAYS plans, including low-income drivers who typically drive less but often don’t see a reduction in premiums. Additionally, drivers with lower mileage, fewer hard brakes and starts, people who travel outside of peak driving times and those who follow traffic and speed rules have lower accident rates. However, different insurance plans may use various measures to assess the customer’s crash risk to reward these customers.

Companies could be undercharging customers as much as 31 percent. Businesses that don’t fully factor driving behavior into insurance premiums are likely to lose money. For example, two demographically similar drivers may behave differently behind the wheel. One individual may have a much higher risk of being involved in a car crash and, therefore, should have a higher premium.

Behavior-based plans are potentially better for the environment and society. Through such plans, policyholders would have the ability to lower costs by driving fewer miles, by driving more safely, by driving outside of peak times or by selecting routes away from high-risk areas – which could lead to less congestion, traffic accidents and air pollution. According to the Brookings Institution, usage-based insurance would spur an eight percent reduction in driving and related greenhouse gases, yielding up to $60 billion in net social benefits.

Compared to usage-based auto insurance plans, traditional plans are problematic. These typically use actuarial models that base insurance rates on an individual’s age, gender, marital status, driving experience and other factors that basically charge higher prices to one group of policyholders in order to subsidize lower prices for another. In addition, these are basically “all-you-can-drive” plans that fail to discourage users from excess driving, which potentially exposes policyholders to more claims.

“The availability of advanced technology and big data has changed insurance market,” says Ma. “Automotive telematics enables insurers to underwrite with greater specificity and accuracy, thereby reducing the negative effects of standardized premium pricing. The new rating scheme also provides incentives for people to improve their driving habits. With some creativity, insurance companies may even leverage telematics data in other innovative ways that will encourage safer driving. Embracing and adapting technology in the years to come is inevitable for both insurance companies and consumers.”